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July 29, 2011

10 Best Investments for a Default or Downgrade

Profiting from destruction always feels creepy, but we all gotta eat

Municipal investments are at risk of default, money markets have broken the buck and now the U.S. Government is at threat of a downgrade—where in the world can investors find safety?

As debt disaster looms (or not, depending on whom you believe) The Atlantic offers up a few investments that can protect—and in some cases profit—from the coming fiscal Armageddon.

1. Dividends and Cash Balances—As The Atlantic (sans Monthly) wisely notes, “AT&T, with a yield of 5.7%, will not default on its dividend obligations. Neither will General Electric, which pays a yield of 3.1%. McDonald’s not only pays a high dividend, it has bought back billions of dollars of its own shares in the last five years, which has had the effect of lifting the stock price.” What do all of these companies (and at least a dozen other public companies) have in common? Significant cash on hand, strong earnings and no chance of default or a suspension of their dividend payouts, the piece says. Isn’t that what we all said about the federal government?

2. Gold—Despite Ben Bernanke’s recent tweaking of Ron Paul over whether or not gold is money, we all agree gold has value (more so than ever before). But as The Atlantic notes, “The trouble with gold as an investment is that the limited supply means prices will rise as more people and institutions buy it as a ‘safe haven.’ That means the price will probably go higher than its current all-time record, maybe even double, as some analysts believe.” But it’s a double-edged sword, and the piece notes “its worth will fall precipitously if there is a solution to the debt disaster, the crisis in the EU and the slow global economy.”

3. T-bills—One area on which the government will most certainly not default is in Treasury bills. “The yield on T-bills is near zero, but some have maturities of as little as four weeks. The financial world knows how little risk is involved in holding T-bills and will almost certainly not trade them lower,” The Atlantic states.

4. Swiss Francs—Chocolate, Heidi and money (or the ability to hide it); three things we love about the “land of neutrality.” As the piece notes, “the balance sheet of Switzerland is among the best in the world. Billions of dollars have already poured into the franc this year. This has sent its value up from $0.95 to $1.24 in a year.” Sure, but once again, the franc’s value could fall if the debt crisis is solved. Anyone else beginning to feel creepy about rooting for default?

5. Triple-A Corporate Bonds—Besides buying stock, The Atlantic notes another way for investors to seek the safety of American companies with the strongest balance sheets. “That alternative is to invest in the corporate debt of the last four U.S. firms that still have Aaa ratings of their own: Exxon Mobil, Johnson & Johnson, Microsoft Corp., and Automatic Data Processing Inc. Economic Data recently made the point that Microsoft’s balance sheet is so solid that its borrowing costs are as good as those of the U.S. government, which means its payout to investors is tiny.”

6. Silver—See gold above. The authors add, “The devil’s metal is attractive as an investment in the case of a government debt default for many of the same reasons that gold is. Additionally, it has the benefit of being the de facto currency on Wall St. in the extreme cases when paper currency can be devalued.”

7. Gold & Silver ETFs—If you don’t like direct investments in the assets themselves, try an ETF. That increasingly common phrase could be the mantra for the investing decade, but it doesn’t make it any less true. “Many investors will turn to exchange-traded funds and other exchange-traded products rather than try buying hard gold or hard silver assets,” the authors write. “The reason is simple: gold and silver have to be re-certified to be put back into the system. Middlemen take a cut as the metals are bought and sold. If there is a full breakdown in the economy, taking delivery of gold will be nearly impossible. ETFs take away that problem.”

8. Singapore Funds: iShares MSCI Singapore Index Fund—You can’t spit on the sidewalk in this Orwellian island nation state, but you can sure invest in their index funds. “Singapore may be one of the safest markets for U.S. investors who want international exposure in the event of trouble with U.S. debt,” according to the piece. “When we covered the nations with Aaa ratings earlier this year, we noticed it was Singapore that had one of the strongest ratings in the world. It is perhaps the most advanced economy of its kind, and this ETF is down less than 3% from its recent highs.”

9. Canadian Funds—Our neighbors to the north take a good ribbing over beer and hockey, but their Canadian funds are no joke. The Atlantic notes the CurrencyShares Canadian Dollar Trust is “the easiest investment for most U.S. citizens to make into a North American nation. Canada has an economy that is based upon hard assets, many of which will rise in value with commodities. Mining, minerals, oil and agriculture dominate the economy. Canada is still the top trading partner of the U.S.”

10. International Bond Funds—Not much surprise here, if you avoid Greece and Ireland, that is. The Atlantic gives a shout-out to the T. Rowe Price International Bond Fund. “The average maturity is between 5 and 10 years, so it is not an international money-market fund. Its performance and its holdings could easily make it one of the more focused funds if U.S. investors decide to begin looking for safer opportunity outside U.S. stocks or government debt.”